Energy Policy and Planning Office by alicejenny

VIEWS: 1 PAGES: 26

									 Privatisation Master Plan

     Energy Sector Report

                    Redraft




                 Updated by

National Energy Policy Office

            2 September 1998
18. Energy Sector
A gradual evolution has been taking place within the energy sector that has as its foundation
enhanced private sector participation through the opening of market. To date, this has occurred
primarily in the form of a comprehensive Independent Power Producer (IPP) program and the
facilitation of privately owned distributed generation facilities under the Small Power Producer
(SPP) program. Competitive markets play a part in the refining and distribution of petroleum
products and the exploration of gas.

18.1 Sector Structure
18.1.1         Power Industry

Current Electricity Supply Industry (ESI)

Generation and Transmission Level:

1. The Electricity Generating Authority of Thailand (EGAT) is the principal entity in the power
   sector of Thailand. EGAT has the responsibility to provide electric energy for the whole
   Kingdom by generating, transmitting and selling bulk energy to distributors.

2. Private sector participation in the power sector is in the form of IPPs and SPPs.
   Additionally, the Electricity Generating Company Plc (EGCO) was initially formed as a
   subsidiary of EGAT and has a total installed capacity of 2,056 MW. EGAT, currently, hold a
   25% stake in EGCO.

   The first round IPP solicitation selected seven bidders for a total capacity of 5,944 MW. The
   first project is scheduled for operation in late 1999. The SPP program currently has
   approved projects of 4,638 MW, of which 2,436 MW will be sold to EGAT based on
   negotiated contracts.

Distribution Level:

The two principal distribution companies are :

1. The Metropolitan Electricity Authority (MEA), which is responsible for the distribution in
   the greater Bangkok area, Nonthaburi and Samut Prakarn provinces.

2. The Provincial Electricity Authority (PEA) is the distributor for the rest of Thailand.




                                                                                                   2
                                     Figure 18.1: Current ESI Structure

                                      SPPs        EGAT               EGCO         IPPs 2
                    Generation       SPPs 1      EGAT 1             EGCO 1       IPPs 2
                                      (1%)
                                     (1%) 1       (87%)
                                                 (87%) 1             (12%)
                                                                    (12%) 1                             NN
                 (% Market Share)                                                          Planning &
                                                                                           Investment   aa
                                                                                                        tt
                                                                                                        ii
                                                                                            Pricing     oo
                                                                                                        nn
                                                                                                        aa
                                                                                                        ll
                                                      EGAT (100%)                          Planning &
                   Transmission                      EGAT (100%)                                        EE
                                                                                           Investment    n
                                                                                                        n
                                                                                            Pricing     ee
                                                                                                        rr
                                                                                                        gg
                                                                                                        yy
                                                                                                        PP
                                       PEA
                                      PEA                   MEA
                                                           MEA
                                                                                 Direct
                                                                                Direct                  oo
                                      (58%)                 (39%)              Customers
                                                                              Customers                 ll
                   Distribution      (58%)                 (39%)                                        ii
                                                                                  (3%)
                                                                                 (3%)                   cc
                                                                                                        yy
                                                                                                        O
                                                                                                        O
                                     Customers        Customers
                                                     Customers                                          ff
                                    Customers                                                           ff
                                                                                                        ii
                                                                                                        c
                                                                                                          c
                                                                                                            e
                                                                                                        e




           Note
           1. As of December 1997, total installed capacity was 17,391 MW
           2. Currently, seven IPPs are in the construction period
           Source: NEPO, EGAT

Future Structure

The future structure will follow the competitive model being implemented in many countries
around the world. This competitive model provides for competitive generation companies
(GENCOs), which both compete into a power pool as well as having individual bilateral
contracts with major customers.

An independent system operator (ISO) provides for the competitive power market. It is
important that the ISO own no generation, so that it functions as an independent referee over
the competitive generation process. With the ISO having no asset ownership, potential and
perceived conflicts of interest are avoided. The transmission company is owned and maintained
by a separate company from the ISO. The transmission company is regulated by the national
regulator because it is a natural monopoly, and regulation will ensure open access as well as a
reasonable tariff.

The distribution companies (DISCOs) will have geographical responsibility for distributing
power within sections of Thailand. Since, under this model, distribution acts as a natural
monopoly, the regulation of access and tariff levels will be set by the national regulator. The
retail supply function can be achieved by DISCOs or by independent supply companies.

This competitive model was first developed in Chile in 1982 and received international
recognition when it was adopted in the United Kingdom in 1989. Subsequently, it has been
implemented in Argentina, the Nordic countries of Europe, and Australia. It is being
implemented in the United States extensively, with California having implemented it in 1997
and 1998.



                                                                                                                3
The implementation of this future ESI represents a complex, technical and political challenge.
To date, it has been implemented primarily in developed economies, and in Asia, only in
Australia. Accordingly, for planning purposes, an implementation process in three stages is
planned and will require five or more years to accomplish.

                                              Figure 18.2: Long Term ESI Structure



                Competitive
                Generation                    Hydro Plants                     GENCOs
                Companies
                (GENCOs)
                                                                                                                 R
                                                                                                                 R
                                                                                                                 ee
                                                       Independent System Operator                               gg
               Wholesale Pool                         Independent System Operator
               (POOLCO)                                                                                           u
                                                                                                                 u

                Regulated                                 Transmission Company                                   ll
                                                         Transmission Company
                Transmission
                Company                                                                                          aa
                                                                                                                 tt
               Distribution                 DISCO                  DISCO                 DISCO*                  oo
                                            DISCO                  DISCO                 DISCO*
               (DISCOs)
                                                                                                                 rr

                Retail Supply
                                                                   Supply




                                                               Customers
                                                              Customers **
                                                                       **


Note :
         *    Further study to determine the number of distribution companies is required
         **   The customers demanding for the certain amount of electricity would be able to purchase electricity directly from GENCOs or power
               pool. The regulator will be responsible to determine the details of the qualified customers.



The 3 stages of power market reform which is consistant with the NEPO's proposed model are
shown below:




                                                                                                                                             4
Stage I: EGAT as primary power purchaser/provider (Starting from the passage of the
Corporatisation law-2001)

                             Figure 18.3: Future ESI Structure – Stage I


                              SPPs
                             SPPs              EGAT
                                              EGAT                    IPPs
                                                                     IPPs
       Generation

                                                                              RR

                                                                              ee

                                                                              gg
       Power Purchaser,                 
                                            Power Purchase
                                            Power Purchase
                                            System Operation                 uu
       System Operation,       EGAT        System Operation
                              EGAT          Transmission
       and Transmission                    Transmission                      ll
                                        
                                            Bulk Power Supply
                                            Bulk Power Supply
                                                                              aa

                                                                              tt

                                                                              oo
       Distribution/          PEA            MEA                    Direct
                                                                   Direct
                             PEA             MEA
       Retail Supply                                              Customers
                                                                 Customers    rr




                              End            End
                                            End
                             End
                             Users          Users
                                            Users
                             Users




Corporatising EGAT as a whole, with autonomous business units operating as profit centers
and privatising Ratchaburi power plants, with regulatory controls established to ensure non-
discriminatory treatment of all generators by transmission.

In this stage, EGAT would retain its pre-eminent position in bulk purchase and supply of
power, with MEA and PEA retaining their franchise customer base (other than that which is
served by SPPs)

The key attributes and issues associated with Stage I are as follows:

   Limited private sector participation in generation providing for a portion of the capital
    needs of EGAT.
   Long-term central power planning under EGAT’s responsibility.
   Limited accountability or incentives to gain productivity efficiencies, due to a lack of
    competition between the generators.
   Commercial risk shared by the private sector and the government-owned entities.
   No customer access to competitive power, except through SPPs.
   Approval for an independent regulatory regime for electricity




                                                                                                5
EGAT’s structure in this step is presented in figure 18.4

                                 Figure 18.4: Future EGAT Structure – Stage I

                                                             Ministry of
                                                             Ministry of
                                                              Finance
                                                               Finance
                                                                    100%

                                                         EGAT Company Limited

                                                              BU
                                                             BU 33
                         BU 11
                          BU                BU
                                           BU 22           New Power
                                                                                BU
                                                                               BU 44        Policy & Planning
                                                           New Power        Transmission
                          PG
                         PG 11              PG
                                           PG 22              Plants       Transmission
                                                             Plants
                                                                                                  Accounting &
                                            BU 66
                                             BU                                                      Finance
                         BU
                        BU 55               Mining
                                                               BU
                                                              BU 77
                      Engineering          Mining          Maintenance
                     Engineering         (Fuel Supply)     Maintenance
                                        (Fuel Supply)
                                                                                             Administration

                          OU
                         OU 11              OU
                                           OU 22
                         Hydro
                         Hydro           Construction
                                        Construction                                          Demand Side
                                                                                              Management

                                          <= 49%
                                  Ratchburi
                                 Power Plant
                                  Company
                                           >= 51%
                                    Investors



Stage II: EGAT as central supplier of power, with gradual introduction of wheeling (From
year 2001 to 2003)

                                    Figure 18.5: Future ESI Structure – Stage II



                                            SPPs                  Powergens                IPPs
            Generation
                                                                                                                 RR

                                                                                                                 ee

                                                              
                                                                   Power Purchase
                                                                   Power Purchase                                gg
             Power Purchaser,                   EGAT
                                               EGAT                Bulk Power Supply
                                                                  Bulk Power Supply                             uu
             System Operation,
                                                               Transmission Company
             and Transmission                   EGAT T
                                               EGAT - -T       Transmission Company
                                                                                                                 ll
                                                                 (TRANSCO)
                                                                (TRANSCO)
                                                                                                                 aa

                                                                                                                 tt

                                                                                                                 oo
             Distribution/                    PEA                   MEA                    Direct
                                             PEA                    MEA                   Direct
             Retail Supply                                                               Customers               rr
                                                                                        Customers



                                             End                    End
                                                                   End                    Large
                                            End
                                             Users                 Users
                                                                   Users                Consumers
                                            Users




                                                                                                                      6
Remark: EGAT has commented that, in their understanding, the term “Direct Customers” is
specific to those customers which are sole EGAT customers. It is intended that IPP’s will be able
to sell power direct to large customers under Stage 2, rather than to EGAT’s direct customers.
Consequently, this figure has been amended to indicate a line from IPP’s to Large Consumers
(End Users).

EGAT would retain its position as central supplier of power. EGAT would be a holding
company, with a transmission operator (EGAT-T) as a subsidiary and other functions initially as
profit centers that are subsequently corporatised. However third party access is gradually
introduced to allow power producers to sell directly to users, using the wheeling services of
EGAT-T, and MEA’s or PEA’s distribution lines.


The key attributes and issues associated with Stage II are as follows:

   EGAT would face competition in bulk purchase and supply of power.
   Enhanced private sector participation in both generation and retail supply by permitting
    generators to sell directly to larger customers.
   Generators will be required to compete for sales to large customers, thus enhancing the
    efficiency drivers on the generation sector.
   A regulatory framework will be required for transmission and distribution pricing (as
    explained below under Regulatory Structure). This would include the establishing an
    independent regulator and implementing an incentive regulation scheme.
   An alternative mechanism for funding subsidiaries implemented enabling MEA and PEA to
    be placed on level playing field with new competitors. The most likely mechanism would
    be a levy on generation, which would produce a pool of funds to be used to provide the
    target subsidies.
   Continued role for EGAT as the central agency for long-term planning and system
    operation.

In this state, EGAT ‘s structure will be as in the below figure.

                             Figure 18.6: Future EGAT Structure – Stage II


                                            EGAT
                                           EGAT
                                         Company Ltd.
                                        Company Ltd.


                                                                    Administrative
                                                                    Administrative




                            Powergens
                           Powergens
               Powergens
              Powergens                   TRANSCO
                                         TRANSCO        Operating
                                                        Operating   NON-CORE
                                                                    NON-CORE
                  100%
                 100%                       100%
                                           100%           Units
                                                          Units
                            Investors
                           Investors



   All business units to be corporatised
   Increased private investment in Powergens



                                                                                                7
Stage III : Competitive wholesale power pool / introduction of retail competition (From year
2003 onward)

                                          Figure 18.7: Future ESI Structure – Stage III

                Competitive
                Generation                    Hydro Plants                     GENCOs
                Companies
                (GENCOs)
                                                                                                                 R
                                                                                                                 R
                                                                                                                 ee
                                                       Independent System Operator                               gg
               Wholesale Pool                         Independent System Operator
               (POOLCO)                                                                                           u
                                                                                                                 u

                Regulated                                 Transmission Company                                    ll
                                                         Transmission Company
                Transmission
                Company                                                                                          aa
                                                                                                                  tt
               Distribution                 DISCO                  DISCO                 DISCO*                  oo
                                            DISCO                  DISCO                 DISCO*
               (DISCOs)
                                                                                                                 rr

                Retail Supply
                                                                   Supply




                                                                Customers
                                                               Customers **
                                                                        **


Note :
         *    Further study to determine the number of distribution companies is required
         **   The customers demanding for the certain amount of electricity would be able to purchase electricity directly from GENCOs or power
               pool. The regulator will be responsible to determine the details of the qualified customers.



In the long term, it is envisaged that a competitive wholesale power pool will be developed
with power trading taking place within this pool. Retail competition would be introduced
initially for certain customers and gradually expanded to cover a wider group of consumers.
Generation companies (GENCOs) would bid into the wholesale “pool” and be dispatched in
accordance with the lowest bid offered which satisfies demand for that period (perhaps on a
half-hourly basis).

To implement government energy policy such as fuel diversity and maintain adequate
competition among GENCOs may require regulation of generation. This may require a fuel
preference in fuel licensing or fuel allocation for pool purchase.

An Independent System Operator (ISO) would be responsible for economic merit order
dispatch, as well as system security and financial settlements for bulk power purchases. The
ISO would be formed as a government corporation funded by use charges on power purchases
and sales.




                                                                                                                                             8
Retailers (which may or may not be a combined distribution and retail enterprise) would have
non-discriminatory access to the transmission and distribution network, with a regulated
Transmission and Distribution access tariff paid to the relevant network service providers.

As transitional matter, Distribution Companies (DISCOs) would retain a customer franchise
base. Only large customers will be given access to the competitive market at first. Franchises
will be gradually unwound as the market matures, and certain commercial and regulatory
issues are resolved such as the vesting of PPAs and treatment of subsidies.

EGAT in this stage would remain a holding company with TRANSCO (EGAT-T) as its
subsidiary, hydro generation plus minority interest in some GENCOs and additional certain
supporting functions.

Accomplishing the long-term ESI will require extensive restructuring of existing electric entities
in Thailand as follows:

   Generation owned by EGAT would be spun off into separate groups of GENCOs (with the
    possible exception of hydro).
   An independent system operator would be established.
   PEA may consider to split into corporatised distribution companies (DISCOs). The future
    study to determine the optimal structure is required. The key factors needed to be
    considered are the energy consumption in each area, the impact to new distribution entity’s
    performance and its customer.
   A separate supply function would be established and corporatised, either owned or
    independent from the DISCOs.

The key attributes and issues associated with the competitive electricity structure are as follows:

   Private sector participation in both generation and retail supply.
   Competitive neutrality between state-owned and private sector generation companies,
    fostering real competition in bulk and retail supply of power.
   With the correct design of a competitive structure, there would be strong efficiency drivers
    in power generation and retail supply.
   Market signals replace central planning. Since the larger customers will have direct access
    to generators, new capacity will only be added as economically justified by competitive
    supply-and-demand relationships.

EGAT’s structure in this stage is illustrated as in the figure 18.8 .




                                                                                                   9
                           Figure 18.8: Future EGAT structure – Stage III



                                               EGAT
                                              EGAT
                                            CompanyLtd.
                                            CompanyLtd.




                              TRANSCO
                             TRANSCO          Powergens
                                             Powergens     Operating Units
                                                           Operating Units
                                                               Hydro
                                                              Hydro
                               Investors
                              Investors       Investors
                                             Investors




   TRANSCO in process of full privatisation
   All Powergens in process of full privatisation

Remark: Arthur Andersen has proposed that Hydro Power Plants and other operating units be
under EGAT PLC in the Stage 3 structure. The issue of the final disposition of Hydro Power
Plants is subject to further analysis and study.




                                                                                         10
Key Power Sector Issues

Three key issues will be addressed in restructuring the electricity supply industry and moving
it to a competitive, privately owned sector.

1.   Restructuring Authority

The restructuring of the electricity supply industry (ESI) involves broad policy and
industry-wide issues. NEPO and the three principal state-owned electric entities are currently
addressing these issues.

Effective restructuring best practices as experienced by many countries has demonstrated the
need for a front-end, industry-wide restructuring plan implemented by a central authority.
NEPO should continue the implementation of the reform program started in the early 1990’s
through ongoing co-ordination with EGAT, MEA, PEA, and other agencies.

As NEPO restructures itself to separate its energy policy role from regulation, there would need
to be co-ordination with SERC and MOF, although restructuring of the power market would be
designed and implemented by NEPO. Subsequent privatisation of the government-owned
entities would involve decisions by SERC and MOF, in co-ordination with NEPC and NEPO.

2. National Tariffs in a Competitive Market

Although not ideal, the continuation of national tariffs within customer classes can be
accommodated within a competitive market. However, a framework for provision of the
national tariff will need to be developed to support competitive neutrality among the various
market participants.

For example, currently EGAT imposes bulk power tariffs on MEA higher than PEA (levy on
MEA's tariff and subsidy on PEA's tariff). This cross-subsidy is the means in which PEA is able
to provide power to their customers at a price uniform with Metropolitan customers, even
though the underlying economics of the transmission and distribution network in the Provinces
entail significantly greater costs per customer. The drawback here is that the price signals
related to power purchase are distorted, and would not support true competition in bulk power
supply.

The basis for a framework which supports competition is to clearly identify the nature of the
subsidy (for example, the provision of power to certain customers at less then the cost of
supply); establish the financial cost of the subsidy to the relevant agency; and establish a means
of funding that cost short-fall in an equitable and transparent manner.

More specifically, it would be preferable to firmly establish (as a matter of public policy) the
nature of subsidy, assign a cost to it, and to then offset the costs to relevant agencies though a
funding mechanism.




                                                                                                     11
Advantages of this framework include:

   financial viability of uniform tariffs;
   facilitation of competitive neutrality among market participants;
   transparency of costs in which to support well informed policy making and performance
    monitoring; and
   provision of subsidies on an equitable and economically efficient basis.

3. PPAs in a competitive market

The model of IPPs selling power under PPAs is based on EGAT’s role as the predominant
power purchaser /provider. If full competition is to be realised at the generation and retail
level, certain adjustments will have to be made in existing PPA’s in a manner that is mutually
agreeable to all parties.

The existing PPAs represent investments based on Purchase Power Agreements (PPAs) with
EGAT. The developer/owner bid the PPA based on terms acceptable to EGAT. In turn, the
PPA provided the security for debt financing with financial institutions. These PPAs represent
very large, multiyear contracts that would be difficult to unwind.

One possible option involves the assignment of the PPA contracts to these DISCOs or GENCOs
that are spun out of EGAT. Given the contractual terms of the PPAs, the provision of
substantially equal financial security by the new obligator under the contract to the owner of
the IPP will need to be mutually agreed.

Any new PPAs that are entered into by EGAT should be able to transform into the competitive
market. One alternative is that any new PPAs that are entered into are either short-lived or are
short-lived with automatic extension clauses (in the event, that the competitive market is not yet
established). Alternatively, the PPA’s could be prepared to allow them to transform to
Contracts for Difference’s (CFD’s) once the power pool commences operation. It may be feasible
to consider 5-year agreements, with options to extend under certain conditions. Further study
is required on which method should be used and how quickly they can be implemented for
EGAT’s power plants that are be privatised.




                                                                                                 12
18.1.2        Natural Gas Industry

Current Gas Supply Industry Structure (GSI)

The gas industry in Thailand is virtually dominated by two players, the Petroleum Authority of
Thailand (PTT) and the Electricity Generating Authority of Thailand (EGAT)

1. PTT with the only a few minor exceptions, acts as the sole purchaser, transporter and
   distributor of natural gas in Thailand. PTT purchases all indigenous gas from the producers
   including PTT Exploration and Production (PTTEP) and transmit this through its pipeline
   system to end-users.

   Private participation in pipeline construction has been introduced with the establishment of
   PTTNGD, a joint venture pipeline owned 49% by PTT and the balance by private
   companies.

   PTT’s activities consist of gas exploration and development, gas pipelines, and gas trading.
   In the petroleum sector, they consist of refining and retail distribution, international trading
   activities, and a number of international downstream joint venture operations.

   Its network of pipelines currently stretches 1,512 km, linking all commercial offshore gas
   fields to EGAT’s power plants, its four gas separation plants (GSPs) and industrial users. All
   PTT’s contracts, whether with suppliers or consumers, are on a long-term (20-30 year)
   minimum take-or-pay basis.

2. EGAT is by the far largest consumer of natural gas in Thailand. In 1997, 75% of natural gas
   consumption went for power generation, 14% for the production of LPG and petrochemical
   feedstock from the GSPs and 11% was consumed as industrial fuel. There is no retail gas
   industry as yet.




                                                                                                 13
                                   Figure 18.9: Current GSI Structure

                                    Unocal      PTTEP       Total   Mitsui          BG        Others
                   Exploration &    Unocal     PTTEP       Total    Mitsui         BG         Others
                                     (60%)
                                    (60%)        (25%)
                                                (25%)       (17%)
                                                           (17%)      (7%)
                                                                     (7%)          (3%)
                                                                                  (3%)         (15%)
                                                                                              (15%)
                   Production




                   Pipelines &
                                                              PTT (100%)
                                                             PTT (100%)
                   Supply /
                   Trading


                   Gas                                        PTT (100%)
                                                             PTT (100%)
                   Separation



                   Distribution                   PTT (100%)
                                                 PTT (100%)                            PTTNGD
                                                                                      PTTNGD



                                                       LPG
                                                      LPG ++         Industrial
                                       EGAT        Petrochemical    Industrial             IPPs/
                                      EGAT        Petrochemical      Customers            IPPs/
                                       (75%)         Feedstock      Customers              SPPs
                                      (75%)         Feedstock          (11%)              SPPs
                                                       (14%)          (11%)
                                                      (14%)


           Source: PTT, NEPO


Future Structure

NEPO (14 May, 1998) has proposed a market structure for gas supply which anticipates:

   Separation of transmission and trading
   Third party access
   Common pipeline tariffs
   An independent regulator
   Competition in trading
   Competitive tendering for construction and ownership of new transmission and distribution
    pipelines




                                                                                                       14
                                   Figure 18.10: Future GSI Structure

                                   Transactions            Physical Flow


               Exploration and
               Production              G                     E&Ps
               (Including PTTEP)
                                        a
                                        s


               Transmission &           T
               Distribution                               T & D Pipelines    Regulator
               Pipelines                r
                                        a
                                        d
                                        e
               Customers                r                  Customers
                                        s




The competitive market model described above has been demonstrated in a number of
countries to provide for reliable and efficient supply of energy to consumers. There are two
essential issues that need to be given further consideration.

1.     Separation of PTT’s gas transportation and trading functions.

Separation of PTT’s gas transmission pipeline function, either accounting or legal, from its gas
trading is a pre-condition to promote competition. Full legal separation by corporatised entity
would be preferable to facilitate transparency and regulation.

The most important point here is that most gas sales in Thailand are to power plants under long
term contacts. With this in mind, the establishment of a competitive market based on further
sales and flexible supply arrangements is anticipated to evolve over a fairly long time horizon.

In the interim, PTT will be the dominant trader as well as providing transmission services. This
will result in a gradual transition to a competitive market which is needed to phase out PTT
long term purchase commitments. Also, this transition will give comfort regarding gas security
concerns.

Remark: PTT and NEPO have agreed to a legal separation between transportation
(transmission) and trading at a meeting on 26 August 1998. This position is endorsed by the
Department of Mineral Resources.

2.     Third Party Access

The primary aim of promoting competition in certain market components of the gas industry is
to increase industry efficiency and ultimately yield benefits to end users in the form of lower
prices and improved service.



                                                                                                   15
The establishment of third party access to gas transmission pipelines is seen as a means of
facilitating the development of competition in gas supply. The provision of access to these
facilities by third parties on fair terms and conditions (potentially) allows end users to purchase
gas from upstream producers, or continue to purchase the bundled service of gas transmission
and supply from the pipeline owner. Currently, the issue and possible use of Third Party Access
is under review. Additional analysis is required on this and other possible options.

“Special Purpose Pipelines”

While common (predefined) charges are appropriate for common carrier transmission
pipelines, a more flexible approach may better support ongoing investment in gas
infrastructure. The basis for this approach would be that the developers of new pipelines
would be granted a franchise under terms that will allow them to negotiate use of the pipeline
with customers. This alternative approach would be relevant for special purpose pipelines with
a limited number of customers.

Under this approach, the broad framework for access would be well defined, but the actual
setting of the terms and conditions (such as tariffs) would be subject to negotiation. This allows
for a level of commercial control on the part of the owner. On the other hand, there is potential
for abuse of this position in terms of monopolistic pricing of the transmission service. To
balance these matters, a process would need to be established to address disputes arising from
the negotiation process, with recourse to a predefined means of arbitration.

Remark: PTT, DMR and NEPO have agreed on the development of a Third Party Access Code
to set the terms of access to common carrier pipelines. This code will be developed by the end of
1998, with implementation in 1999 in preparation for the introduction of competition in 2000.
The recommendation by Andersen Consulting that access to “Special Purpose Pipelines” be
provided through individual negotiation is subject to further review and consequently does not
constitute policy for the GSI at this time.




                                                                                                16
18.1.3         Oil industry
The oil industry operates in a liberalised and competitive market and has significant private
capital participation in refining and the distribution of petroleum products. The pricing of
refined oil is under free market conditions.

PTT is the one of the key players in oil refinery and trading. Its operations include refining,
retail distribution, and oil international procurement.

PTT has a number of passive investments in a number of energy related activities including
minority interests in oil refineries including Bangchak, petrochemical plants and international
joint ventures. This portfolio strategy needs to be reconsidered resulting in exiting certain
investments and redeploying the capital to more focused opportunities under PTT control.

The exit strategy should consider offering such investments to the majority owners, strategic
partners, and/or public.

After the completion of the re-deployment of capital and creating an open access gas
transmission system, PTT will be a synergistic, integrated petroleum company. At that point in
time, the privatisation of PTT should proceed ensuring the maximum proceeds.

PTT Structural Alternatives

Together with the structure of the GSI, the selection of the corporate structure of PTT represents
the most important decision for the future oil and gas industry. Two corporate structural
options for PTT have been considered:

1. The IPO of PTT as an integrated oil and gas company.
2. The IPO of PTT gas.

The principal argument for PTT as an integrated company with oil and gas operations is that it
would have significant strategic advantages for the company. These strategic advantages would
include:

   More effective execution of multi-business regional opportunities.
   Scale strengthening competitive negotiating positions.
   Protection of domestic position from integrated competitors.
   Diversity of investment opportunities making PTT the partner of choice.
   Rapid, strategic and operational adjustments facilitated in a changing competitive context.

Other arguments for an integrated PTT are related to operational and financial synergies. These
include:

   Potential cost savings by consolidating corporate overheads.
   A reduced earning volatility because of this business diversity.
   An integrated structure providing for economies of scale.


                                                                                                  17
   Capital investment optimised by allowing flexibility to reallocate capital.

The Board of Directors of PTT has approved the recommendation of PTT’s financial advisors to
proceed with an IPO of PTT as an integrated oil and gas company. This recommendation is
proceeding through the government approval process.

Remark: Given acceptance by all parties of the policy for legal separation of transmission and
trading, NEPO accepted the PTT’s proposal on 26 August 1998 for the corporatisation and
privatisation of PTT Holding to include PTT Gas as a legally separated entity.




                                                                                                 18
18.2 Regulatory Structure
The National Energy Policy Council (NEPC), reporting to the Prime Minister, is the highest
level organisation involved in energy regulation and established under the National Energy
Policy Council Act.

Under the act, the Energy Policy Committee (EPC) has been established to assist the NEPC by
screening work related to energy management and development prior to submission for the
NEPC commission. The National Energy Policy Office (NEPO) serves as the secretariat to
NEPC and EPC. Currently, NEPO acts as both policy-maker and regulatory body for energy
sector:

                                    Figure 18.11: NEPC Structure


                           NEPC
                           NEPC             Recommending national energy
                                            policies




                            EPC
                           EPC              Screening work related to energy for
                                            NEPC




                           NEPO
                           NEPO             Serving as the Secretariat to the NEPC and
                                            EPC


            Source: NEPO


EPC recommends to NEPC for approval the investment plans and a structure and level of
electricity rates. The level of base electricity rates is determined on the cost-of-service model,
which includes all costs plus a return on equity. By class of customer, the electricity price in
Thailand is uniform across the country. In addition, there is a fuel adjustment clause that
currently tracks changes in the cost of fuel for generation.

As well as NEPO, the energy sector is subject to regulation by a series of government agencies.




                                                                                                     19
                                    Figure 18.12: Existing Energy Regulatory Bodies

                     Department of Mineral
                    Department of Mineral                                     Department of Energy
                                                                             Department of Energy
                           Resources
                          Resources                                             Development and
                                                                               Development and
                     (Ministry of Industry)
                    (Ministry of Industry)                                         Promotion
                                                                                  Promotion
                                                                                    (MOSTE)
                                                                                   (MOSTE)


                  Granting concession for natural gas                               Licensing power generation
                      exploration and production                                        more than 200 KVA


                                              Pricing, Planning     Energy Sector
                                                                   Energy Sector
                      NEPO
                      NEPO
                                                 Investment

              Licensing the sales of power                                      Analysing environmental
                       to the grid                                                       impact

                     Public Works
                    Public Works                                  Office of Environmental
                                                                  Office of Environmental
                      Department
                     Department                                      Policy and Planning
                                                                   Policy and Planning
                        (MOI)
                       (MOI)                                               (MOSTE)
                                                                          (MOSTE)



            Note: Regulatory bodies related with privatisation program
            Source: NEPO


Proposed Regulatory Structure

In restructuring the energy sector and moving it to a competitive market, there is a need for
orienting the regulatory framework to a more commercial and independent sector structure.

The independence of the regulator is seen as an important feature in fostering an environment
of “competitive neutrality” between public and private sector enterprises. This is accomplished
by separating the functions of public policy from regulation.

The regulator may be industry specific (energy) or cover a broader area such as energy and
utilities. The convergence in regulation is evolving in other countries, such as Australia and the
U.K., in which industry regulators are being combined to form a broader utility regulator. The
current context of energy regulation would support the establishment of an industry specific
energy regulatory body.

With the emerging of monopoly under private owned ownership, the key role for the regulator
would be to protect the interest of the customers.




                                                                                                                 20
                                Figure 18.13: Proposed Regulatory Framework



                                            The Cabinet
                                           The Cabinet

                                                                 Responsible for
                 Determines                                     appointment and
                broad policy                                       dismissal

                                                                                      Transferring
                                                              New Energy             authority from
                     Policy Maker                            New Energy
                    Policy Maker                           Regulatory Agency             other
                                                          Regulatory Agency
                                                                                       ministries

                                                          Independent Regulator
                Public Policy
                                                          •   Compliance with market codes
                •   Market design                         •   Fair prices
                •   Subsidies                             •   Customer service standards
                •   Environmental                         •   Dispute resolution
                •   Energy security                       •   Compliance with public policy
                •   Fuel diversity                            requirements
                •   Adequate competition




Based on NEPO’s study of the regulatory framework proposals under active consideration for
future regulation for both the electricity and gas sectors include the following principles: -

   a regulator responsible for regulation of the electricity and gas industries, independent from
    NEPO, accountable to the Prime Minister
   a regulator responsible for key economic (pricing, investment and competition policy) and
    non-economic functions (establishing performance measures and monitoring the quality of
    service). It would also issue licenses as an instrument for regulation. This action will need to
    involve interfaces with other relevant bodies.
   use of primary legislation to establish the regulator and secondary legislation and related
    administrative procedures to implement the regime.
   price cap regulation is being proposed with regular review periods
   the co-ordination of the transition phase by NEPO would involve establishing key
    regulatory functions
   the re-classification of roles and responsibilities of the relevant existing agencies will be
    subject to further study and evaluation to optimise their effectiveness and efficiency.




                                                                                                      21
18.3 Action Plan
Objectives of the privatisation program

The main objective in promoting greater private sector participation in the sector are to:1

   Increase competition in the energy industry to bring about more efficiency within the
    industry and the provision of adequate energy at reasonable prices for consumers;
   Reduce the investment burden of the government as well as the public sector debt;
   Promote the more efficient use of energy such as that demonstrated by SPP projects using
    the cogeneration system;
   Ensure power users are provided with the best possible services, price levels and safety
    standards;
   Encourage the general public’s participation in the energy industry development of the
    country through the development of the capital market;
   Develop the capital market.

Sector Action Plan
Sector Specific Action - Future Market Structure

Market reforms

Power

       Study to determine competitive market structure undertaken in 1999.
       Action plan established for implementation of new market structure in 2000.
       Establish third party access regime for network services in 2001.
       Implement third party access in 2002.
       Open market to competition in bulk supply in 2003.
       Establish wholesale electricity pool 2003
       Establish an independent system operator 2003
       Open market to retail competition on a phased basis starting in 2003.

Gas

       Determine gas supply industry structure in 1998.
       Detail study for gas supply industry in first half of 1999.
       Establish third party access regime for network services in first half 1999.
       Open market gas to competition in 2000 onward.




1Documented in the National Energy Policy Office’s 14May statement on “Privatization and Increasing
Private Sector Participation in the Energy Sector in Thailand”


                                                                                                      22
Legal and Regulatory Reform

Legal/legislative issues to be addressed

   Submission to the Cabinet or other appropriate authorities of secondary legislation for the
    regulation in 1999.
   Submission to the Parliament approval for market reform law in 2000.
   NEPO to co-ordinate the transition to the regulatory structure among all government
    entities.

Regulator operationalised

   Board and Executive named by Cabinet 2nd half 1999.
   Organisational structure established 2nd half 1999.
   Senior staff hired by end of 1999.
   Develop and implement regulatory systems and procedures in 2000.
   Operating licenses placed with agencies in 2000.
   Dispute resolution body operationalised in 2000.

Enterprise Action Plan/EGAT

   By the end of 1999, corporatise EGAT as a whole and the internal restructuring of EGAT
    into autonomous business units as profit centres.
   1999 - privatisation of Ratchaburi power plants.
   1999 and thereafter - will undertake the development, construction and operation of any
    new thermal power plants only by means of wholly owned subsidiaries.
   2001 – establish as a wholly owned subsidiary of EGAT a transmission subsidiary operating
    as "single buyer" of power from all duly licensed generators on an arms-length basis.
   2001 - transfer the thermal generating and the non-core assets into wholly owned
    corporatised subsidiaries of EGAT.

Enterprise Privatisation Plan/EGAT

   1999 – Ratchaburi power plants privatised.
   2001 onward – privatised new power plant.
   2002 – onward existing subsidiaries of EGAT privatised over a phase period of time.




                                                                                                  23
Enterprise Action Plan/MEA and PEA

   By the end of 2000, establish non-core activities as business units
   By the end of 2001, corporatise as wholly owned subsidiaries the non-core activities.
   By the end of 2001, the functions of distribution and supply established as separate cost
    centres within MEA.
   By the end of 2001, the functions of distribution and supply established as separate cost
    centres within PEA.
   By the end of 2001, PEA reorganised into regional distribution units, established as cost
    centres, in preparation for profit Center operation.
   2002 – MEA core electric distribution business corporatised.
   Within the first half of 2004 – PEA regional distribution units corporatised

Enterprise Privatisation Plan/MEA and PEA

   2002 – 2004 – MEA non-core subsidiaries privatised.
   2003 – 2004 – MEA privatised.
   2002 - 2004 – PEA non-core subsidiaries privatised.
   Second half of 2004 onward – PEA DISCOs privatised.

Enterprise Action Plan/PTT

   By the end of 1999, Corporatise PTT

Enterprise Privatisation Plan PTT

   Within 1999, commencing privatise PTT




                                                                                                24
Energy Sector Action Plan

                                                                                1998              1999        2000   2001   2002   2003   2004
                                                                          Oct   Nov    Dec   H1          H2

1. Market Reforms
    1.1   Power

          1. Determine competitive market structure
          2. Action for implementation new market structure
          3. Establish third party access regime
          4. Implement third party access
          5. Open market to competition in bulk supply
          6. Establish wholesale power pool
          7. Establish Independent System Operator
          8. Open market to retail competition on a phase basis

    1.2   Gas

          1. Determine gas supply industry structure
          2. Detail study for gas supply industry
          3. Establish third party access regime
          4. Open market to competition



2. Legal and Regulatory Reform

    2.1   The cabinet approval for secondary legislation for regulation

    2.2   The parliament approval for market reform law

    2.3   Regulartory operation ; Organizational structure, Board &
          Executive named by Cabinet, senior staff hired




                                                                                                                                                 25
                                                                                      1998           1999     2000   2001   2002   2003   2004
                                                                                Oct   Nov    Dec   H1    H2

   3.1 EGAT

       1. Corporatise EGAT as a whole

       2. Privatise Ratchaburi power plant

       3. Corporatise and privatise new power plants

       4. Corporatise each business unit to company

       5. Privatise each subsidiary

   3.2 MEA/PEA

       1. Establish non-core activities as business units

       2. Corporatise non-core subsidiaries

       3. Establish distribution and supply units as separate cost centers

       4. Reorganise PEA into regional distribution units

       5. Privatise non-core subsidiaries (MEA/PEA)

       6. Corporatise core electric distribtution
           - MEA
           - PEA

       7. Privatise core business
           - MEA
           - PEA

   3.3 PTT

       1. Corporatise PTT

       2. Privatise PTT




Note : Privatise SOEs represents the process of initial and subsequent privatisation process. The completion of privatisation process will be finished when the
government hold less than 50% stake in such SOEs.
Remark: While “privatisation” may be completed and the enterprise is no longer a state owned enterprise, the process of selling down the
government’s shareholding would continue as appropriate.




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